As expected Spotless Group (SPO) says its shareholders should reject Downer EDI’s (DOW) $1.3 billion takeover offer because it does not reflect the company’s earnings expectations.
In its much awaited Target Statement Spotless confirmed its profit target of between $80 million and $90 million for this financial year, before one-off items, and expects it to increase to between $85 million and $100 million in 2017-18. While that is above current average broker forecasts of $83 million, it isn’t a very confident estimate for shareholders to consider.
Seeing the company earned $122 million (own 14%) in 2015-16, the forecast means Spotless’s profits will still be pitifully weak for the next two years at least.
"Spotless management do not believe that current broker forecasts for FY18 fully reflect the expected performance of the company due to a number of factors," Spotless said.
The company said these included an expectation that Spotless will benefit from the removal of uneconomic contracts from its books, and a focus on more profitable contracts in high growth markets.
Efforts to reduce debt should also result in the company paying less interest, Spotless said.
Improved control of capital spending and the potential sale of some assets should also strengthen the company’s position. "Your board has carefully considered the offer to assess whether it is in the best interests of Spotless shareholders and do not believe that the offer represents adequate value for your Spotless shares," Spotless chairman Garry Hounsell said.
Mr Hounsell said Downer’s offer was timed to take advantage of an historical low in the Spotless share price, and does not recognise the strategic and financial value of Spotless to Downer. Downer is offering $1.15 for each Spotless share.
Shares in Spotless were steady at $1.075 at the close yesterday. Downer shares edged up to $5.77, still well short of the $5.92 price in the recent $1.1 billion fund raising by Downer.
On Wednesday macquarie recommended Spotless shareholders should sell into Downer’s bid because it wasn’t convinced by the expected profit forecasts coming from Spotless.
"We recommend (Spotless) investors sell into the bid…”
“SPO’s main defence is now around base business performance and to this end it will provide FY17 and FY18 guidance as part of Target statement to be released on 27 April," the analysts said. "We are at lower end of SPO’s $80-90m FY guidance (reported basis) and forecast 13% eps growth in FY18."
